The incoming Trump Administration promised to lighten the regulatory burden on US financial institutions by dismantling Dodd-Frank. As this Act created the Consumer Financial Protection Bureau, the CFPB’s fate appeared uncertain. So far attempts to unravel the Obama Administration’s financial reforms have faltered, and future initiatives are expected to take effect slowly, Robin Arnfield reports.
The Dodd-Frank Wall Street Reform and Consumer Protection Act was passed in 2010 following the 2008–2009 financial crisis. A key element of its remit was tackling unscrupulous behaviour by financial institutions, such as credit card issuers forcing unsuspecting cardholders to accept overpriced insurance.
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The Durbin Amendment to Dodd-Frank introduced caps on debit card interchange, and stipulated that merchants must be provided with a choice between at least two unaffiliated networks for debit card purchases.
As previously there was little government oversight of consumer credit, the CFPB was created in 2010 to defend consumers. Its reforms include rules requiring banks to evaluate consumers’ ability to repay mortgages, reining in debt collection agencies, and requiring issuers to pay compensation to credit cardholders for illegal practices such as deceptive marketing.
According to an estimate cited by Yale Law School just 20% of Dodd-Frank’s required rulemakings had yet to be proposed or finalised as at November 2017.
Recent legislative activity
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By GlobalDataUnsurprisingly, the Republican-dominated Congress has made several attempts to refashion Dodd-Frank’s regulatory architecture.
In June 2017, the House of Representatives passed the Financial CHOICE Act, which revises several major Dodd-Frank provisions, including undoing the Volcker Rule’s restrictions on bank activity and restructuring the CFPB. The Act has yet to pass through the Senate.
In October 2017, the Senate overturned a CFPB ruling which would have prevented consumers going to arbitration in disputes with financial institutions. The banking industry lobbied against the ruling, which would have forced consumers to resort to class-action lawsuits.
The CFPB had contended that rules limiting arbitration are necessary because “pre-dispute arbitration agreements are being widely used to prevent consumers from seeking relief from legal violations on a class basis.”
Brian Riley, Mercator Advisory Group’s Director, Credit Advisory Service, wrote in a blog that the Senate vote “blocking class actions is an indication that CFPB is weakening as the Trump administration begins to take stride in Washington. CFPB unearthed many deceptive sales practices in the card industry, illustrating how over 100 million cardholders oversubscribed to credit card ‘revenue enhancement’ products…The ruling favours the credit card business.”
Power struggle
CFPB Director Richard Cordray, a Democrat appointed by Obama and unpopular with Republicans because of his aggressive moves to rein in banks, resigned in mid-November 2017. Press reports said he wants to run for Ohio Governor in 2018.
Despite Republican calls for Trump to fire Cordray, the Director of the CFPB can only be removed “for cause.”
On 24 November 2017, the CFPB said Leandra English, the agency’s Chief of Staff, had officially been named Deputy Director. Press reports said Cordray had appointed English as acting Director of the CFPB. Trump immediately named White House Budget Director Mick Mulvaney, who is on record as saying the CFPB should be closed, as Acting Director of the agency.
On 28 November, there was drama when a Federal judge refused to block Trump’s nominee after English filed a law suit against Mulvaney’s appointment. The BBC quoted US District Judge Timothy Kelly, who is a Trump appointee, as saying: “Denying the president’s authority to appoint Mr Mulvaney raises significant constitutional questions.”
The row has implications for the future of the CFPB, since the Trump Administration has said it wants to weaken the agency’s power. Democratic Senator Elizabeth Warren, who was a key player in establishing the CFPB, told Reuters she believed the legal dispute would continue to an appeals court. “It’s too important to everyone to let it rest at the district court,” she told Reuters.
Industrial Loan Companies
During 2017, online lender SoFi (Social Finance), mobile banking start-up Varo Money, and Square Financial Services applied for Industrial Loan Company (ILC) charters. These would give them banking licences and deposit insurance from the FDIC without being regulated as bank holding companies. ILCs, unlike banks, can offer non-financial services.
SoFi subsequently withdrew its application due a scandal involving its co-founder.
Square said it is the only financing source available to 67% of its merchant customers, which it defines as small businesses seeking loans under $250,000. The ILC charter would allow Square Capital to directly distribute its loans instead of via a third party.
“Looking at Square’s customers whom it makes loans to, they are largely the segment of small businesses struggling to find traditional financing,” Javelin Strategy & Research analyst Rachel Huber wrote in a blog. “At the end of 2016, 86% of its sellers processed under $500,000 in gross payment volume per year, with 58% under $125,000.”
Fintech national bank charters
In a move opposed by the Conference of State Bank Supervisors, the nationwide organisation of state banking regulators, the Office of the Comptroller of the Currency (OCC) proposes to offer limited-purpose national bank charters to Fintechs. The OCC claims this will provide a regular, consistent regulatory framework for chartered Fintechs and increased competition to develop cost-efficient, inclusive products and services.
In November 2017, the OCC’s Acting Comptroller of the Currency Keith Noreika called for an end to the separation of banking and commerce, under which Amazon or Walmart are banned from owning fully-fledged banks as opposed to ILCs. He also noted that the OCC’s Fintech bank charter proposal is at an early stage.
While depository institutions are largely exempt from state licensing, non-bank financial services firms such as Fintechs or money transfer providers must get authority to provide their services at the state level, potentially in every US state/territory. This imposes considerable cost and administrative overheads on these non-bank financial services firms. The Conference of State Bank Supervisors is calling for state licensing requirements to be streamlined and simplified.
Open Banking
In early 2017, the CFPB requested comments on how consumers would share bank account data with third-party companies. US banks, in response, expressed concern about potential security breaches, while fintechs supported the right of consumers to access all their bank account data on third-party apps.
In October 2017, the CFPB announced a set of non-binding data-sharing principles. These would permit bank customers to access their data on the app of their choice, provided the process is secure and users have full control over what data is shared.
The CFPB said this data would include “any transaction, series of transactions, or other aspect of consumer usage” as well as “the terms of any account, such as a fee schedule; realized consumer costs, such as fees or interest paid; and realised consumer benefits, such as interest earned or rewards.” In addition, the CFPB said that the data must be accurate. It adopted a flexible approach to implementation, avoiding mentioning specific technologies such as screen-scraping or APIs
Industry comments
Scott Talbott, Senior Vice President of Government Affairs at the Electronic Transactions Association.
“The ETA supports the concept of Fintechs offering financial services being able to apply for ILC licences. Most Fintechs already work hand in hand with banks. As a result, we see ILC charters for these firms as a natural evolution of the Fintech space.
“There was initially a stand-off between Fintechs and banks, but both sides have converged and now see the benefits of working together to serve customers.
“Regarding the CFPB, the ETA supports efforts to subject the agency to checks and balances similar to those applied to the three branches of our government, possibly through Congressional oversight of its budget and creation of a five-person board.
“We opposed the CFPB’s rule abolishing the ability of consumers to use arbitration to settle disputes. Arbitration results in quicker processing of consumers’ claims – a matter of months as opposed to several years with class-action lawsuits – with the prospect of higher payouts than class-action lawsuits and almost no fees for consumers.
“We believe regulations should be tailored to the risk profile of individual financial companies and that regulations applicable to a major bank should also apply to a start-up, but to a different degree. Regulations should be tailored to the risk profile of the company, whether it’s a Fintech or a bank. There should be a sandbox regulatory environment for start-ups that applies lighter levels of regulations – once the start-up matures, it should leave the sandbox and be subject to the force of all regulations based on their risk profile.”
Brad Margol, Principal of US consultancy AZ Payments Group
“Regarding the OCC’s proposal to regulate US Fintechs, there’s a question of whether the OCC actually has the authority to regulate them. It’s interesting, because while some Fintechs want to be banks, others just go about their business being unregulated. So who is pushing for the regulation, what will it look like, and why is it necessary, since we have ILC and bank-licensing procedures set up? I think we would only need to regulate Fintechs as banks if they are banks. If not, other regulations would apply outside the realm of the OCC.
“I do think the CFPB will continue to exist, but with different leadership and a less aggressive mandate. But it would be difficult for the Trump Administration, or any Administration for that matter, to eliminate a government agency, especially with events like the Equifax breach happening more and more.
“ILC applications are sent to the FDIC for approval. The CFPB would only get involved with an ILC if they weren’t treating the public fairly. Community banks and others are upset that ILCs don’t have to adhere to the Bank Holding Company Act’s legal restrictions, but that isn’t a CFPB issue at this time. More competition should be better for the consumer.”
David Tente, Executive Director, USA, LATAM, ATM Industry Association (ATMIA)
“There is continued interest in the industrial bank charter concept, but I don’t see too much real progress being made, especially as SoFi withdraw its ILC application. I don’t think regulators quite have their arms around this animal yet or have figured out what they want to do with it. I sense there is at least some support for ILCs and we may see another applicant give it a go soon. But there are a lot of wrinkles to iron out before anything gets finalised. It looks like Dodd-Frank will just get some tweaking here and there.”
Srii Srinivasan, CEO of US-based chargeback/fraud prevention firm Chargeback Gurus:
“In the light of Equifax’s handling of its recent breach, it’s clear more oversight and guidelines are needed. Also, in this age of crypto-currencies, there should be a way to secure the credit reporting system.
“I want to see a unique, secure identifier besides the SSN (US Social Security Number) to protect consumers, similar to two-factor authentication for passwords. The SSN has too much power in all areas of financial life – it was created when there was no Internet and is too vulnerable today. There should be a mandate to stop using or storing SSNs.
“I recommend assignment of a disposable long alpha-numeric code similar to a credit card number in place of the SSN. A separate agency must own the relationship of this alpha-numeric code, which could be cancelled and re-issued like credit cards, to the associated SSN. Only the last four digits of the SSN should be used as verification.”
Christopher Cole, the Independent Community Bankers of America’s Executive Vice President and Senior Regulatory Counsel
“The ICBA called for a two-year moratorium on ILC applications, and opposed Square and SoFi’s ILC applications. The moratorium would give Congress a change to legislate, and we would lobby Congress to close the loopholes in ILC legislation.
“There are rumours Apple or Amazon might apply for ILC status. Were tech giants to apply for banking licences, there would be privacy concerns, as they already accumulate a lot of customer data. If Apple or Google were allowed to own a bank, this would become a repository of personal customer data.
“When very large commercial organisations get involved in banking, this poses difficulties for bank regulators – there would be inherent conflicts within the firm between its banking and commercial sides. Although the US banking system has controls, allowing commercial companies to become banks would make them too big to regulate.”
“We would like to see more congressional oversight of the CFPB in terms of requisitions, and a lighter regulatory burden, but I don’t think Durban will be touched. The Financial Choice Act approved by the House, would change the CFPB in terms of appropriations and make a lot of reversals. But the Bill doesn’t have a chance of passing the Senate before the Christmas recess. I would be hopeful for a modified Bill that could be maybe presented in Spring 2018
Kurt Helwig, President and CEO of the Electronic Funds Transfer Association:
“Congress had intended to repeal Dodd-Frank, but came up against the reality of a slim Republican majority. In order to get things done, they would have needed to get help from the Democrats, which largely has been lacking. Congress does things on a partisan basis.
“I don’t think there will be wholesale changes to Dodd-Frank given the political make-up of Congress. But there may be changes to the margins of Dodd-Frank like capital adequacy requirements to help community banks and some Democratic support to help smaller banks.
“There have been unsuccessful attempts to address Durban in this Congress, but it wasn’t part of the Financial Choice Act. I don’t think we’ll see further action on Durban in the near future. So Durban is here to stay under its current terms.
“The EFTA supports Republican proposals in the Financial Choice Act to regulate the CFPB, which the Trump Administration also supports. This would change the CFPB’s leadership structure from a one-person director to a five-person board. Republicans think that more voices and more diverse views in the CFPB would lead to better regulatory outcomes.
“The Financial Choice Act would also reform the funding and oversight of the CFPB, which currently comes from the Federal Reserve board. All other government agencies must present their funding requests to Congress, which gives Congress oversight of them.
“An issue we’re really focused on is data security. There have been bills for a decade to address cybersecurity and nothing has happened. In the face of inaction from Congress, we’re seeing states enact their own data breach notification and cybersecurity rules. This makes it difficult for the industry as it has to deal with multiple different state cybersecurity rules.
“The Equifax breach could be the catalyst leading to action that gets through Congress. We would ask that any cybersecurity regulation would include federal pre-emption, so the federal standard would supersede the individual states’ standards plus only one regulation on cybersecurity and breaches instead of 50 different state regulations.”
WalletHub
Personal finance site WalletHub conducted an August 2017 survey of Americans’ views of the CFPB. WalletHub said that:
- 54% of those supporting cutting the CFPB’s budget are Republicans;
- 40% of consumers think the Republicans want to cut the CFPB’s funding to get favours from bank lobbyists;
- 49% of consumers would contact the CFPB if they had a serious complaint about a bank (versus 9% the Federal Trade Commission);
- 71% think consumers need more protection (versus 5% wanting less), and
- Over 50% think banks and credit bureaux need more regulation.
